Financial Statements
Financial statements are the final rule books for restaurant management. Without
accurate records, you will never know where you stand on any level of your
food and beverage sales. It is critical that you approach this process with clarity
and accuracy. If you cannot do it yourself, hire a professional immediately. The
business is not just about serving food or drinks; it’s about your ability to analyze
and correct financial problems.
Income Statements
An income statement (also known as a profit & loss statement
or P&L) is your written accounting system that balances your
spending (expenditures) and your income (sales or revenue). This
record will show whether your restaurant is making a profit or
taking a loss. This P&L will show you monthly sales and expenses
as well as annual variances.
All your expenses will be broken into categories, such as food,
beverage, kitchen items, and labor. Within each category you will
have subcategories describing each expense. Often, companies
have accounting codes assigned to each item purchased so
they can have a clear idea of where they are spending money to
operate the business.
After completing this
lesson, you’ll be able to:
• Use a declining budget
for weekly expenses.
• Know when it’s time to
cut back and when it’s
time to control.
• Provide guest
satisfaction that is never
compromised.
• Read and interpret a P&L
statement.
• Use technology to
achieve instant answers
for every dollar spent.
The restaurant business, like any business, depends on watching
your financial statements closely.
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Using a Declining Budget for Weekly Expenditure
An excellent tool for monitoring expenses and staying within the
guidelines of your monthly P&L is a declining budget worksheet. This
allows you to track your total expenses for the month. Keeping track
of your spending allows you to stay within budget.
Example of a declining budget spreadsheet.
The declining budget will provide you with a tool for success
and allow you to keep track of your P&L. It will also allow you
the opportunity to be successful and knowledgeable about your
business. This is YOUR responsibility; no one else can do it.
When to Cut Back Versus When to Control
When a business is struggling, the owner will often make cuts rather
than control and reorganize. You have to determine what is not
working for you and cut back by controlling your costs. If you are still
having trouble after a short period of reorganizing, you may actually
have to make cuts.
An example of control is labor costs. Labor is most likely going to
be your highest expense. You can control your labor costs by staffing
accordingly and ensuring that people are working when they are on
the clock rather than standing around talking.
As you look at your chart of expenses, some are investments that
keep the sales in place. Advertising is one of the first expenses that
an operator looks to cut, and often that cut reduces revenue and
sales, which in turn causes a further erosion of profit. In the kitchen,
ensure you are only buying what you need. Make sure your cooks are
apportioning food properly and you are controlling waste. Anything
wasted is an unnecessary expense.
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Judging What to Cut
If you realize you are in a position that requires you to make cuts,
try to do so without compromising the satisfaction of your guests!
Remember, you are in the hospitality/service industry and people
expect good service and satisfaction. Again, have a plan and create
a program that allows you to clearly understand where to cut and
where to control.
Clarity in the Statement
Keep your P&L statement simple if you are a small operation. If you
are a larger operation, use an accountant who will help you create
the right program. You will want to be sure that you are tracking all
costs and sales for accuracy and ensure you are showing the right
numbers within the right categories. Also, you must determine how
often you want to run your P&L statement. With modern accounting
software, you can view your P&L for any period of time. Typically,
restaurants will look at many line items on the P&L weekly and look
at the whole statement monthly.
Generate and Understand a P&L Statement
Your POS system can provide you with simple information to fill in the
P&L statement easily and effectively. Keeping it simple allows you
to have a better understanding and knowledge of where potential
problems may arise and/or exist. Be sure that the POS system you
choose has the capability to report all of the information necessary
to construct a P&L statement.
If you are going to be successful in running your business, you must
be able to read, understand, and interpret your P&L statement.
The sample P&L statement below is a summary; an actual P&L
statement will contain many subcategories and details for each
cost. Remember that the percentages are important, and you can
use them to compare changes from one period to another, budget
to actual, or your performance to industry norms. Begin by looking
at the total sales revenue [R]. This is the total amount of money
collected on all sales for the period. By subtracting the cost of sales
[C] from [R], we get the gross profit [GP]. This tells you how much
you made before operating expenses and taxes. Operating expenses
are typically comprised of marketing expenses [M] and administrative
expenses [A]. Add the marketing and administrative expenses to get
your total operating expenses [O]. Subtract total operating expenses
[O] from gross profit [GP] to get the total income from operations
[I]. This is how much you made after subtracting operating expenses
but before taxes. Finally, subtract total taxes [T] from income from
operations [I] to get your net profit [NP]. Your net profit is the
amount you made after all costs, operating expenses, and taxes.
Notice that throughout the sample P&L statement, there are
places where the budget was exceeded or not met, and there are
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differences and similarities between this period and last. When you
budget or estimate revenue and the budget is exceeded, this is a
good thing because it means you made money. When you budget
cost and the budget is exceeded this is a bad thing because it
means you spent more than you wanted to. Another way to interpret
the P&L is by comparing the current period to the prior period. Again,
when it comes to revenue larger is better, but the opposite holds true
for cost. The best way to analyze current period versus prior period
is to look for large differences and try to explain them using the
detailed numbers that went into the summary.
The last two figures to interpret on the sample P&L are the gross
margin and the return on sales. Gross margin is found by dividing
gross profit [GP] by total sales revenue [R]. It is an expression,
in percentage, of how much a company earns after the costs to
produce its product(s), but it does not consider operating costs
and taxes. Return on sales is found by dividing net profit [NP] by
total sales revenue [R] and it shows, as a percentage, how much
a company makes after all costs, including costs to produce
product(s), operating costs, and taxes.
The Balance Sheet
Your balance sheet shows what your business owns (assets) and
owes (liabilities) at a given point in time. The balance sheet shows
important assets such as your cash balance, how much inventory
you have, and the current value of equipment you’ve purchased.
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It also shows key liabilities such as a bank loan you may have or
money you owe to suppliers.
Unlike the income statement, which covers a period of time, the
balance sheet is a snapshot of your business on a particular date.
The balance sheet also shows the difference between your assets
and your liabilities, known as your equity. This figure, which is
sometimes called “book value,” is one measure of the value of your
business.
Using Technology
We are in the midst of amazing technological advancements that
allow us to be better informed and more successful in business and
in life. Use technology
where and when you can.
Much of the information
in your PC and POS are
compatible and provide you
with data.
You can also expand your
POS/PC programs to include
inventory programs. There
are handheld scanners that
can be programmed to run
the bar codes on menu
items for more precise
counts. This provides you
more detailed information.
Use technology to your advantage whenever and however you can,
but you must still have a basic understanding of finances to be
successful in the restaurant business.
Liquor control systems can
also be used to ensure
you are not overpouring
alcohol and help you control
measurements and waste.
Summary
Financial statements for your business must be maintained
regularly—day by day, week by week, month by month. You must pay
strict attention to everything to do with your finances, because this
process controls your profits or losses. Food is not as important and
décor is not as important. In the end, finances are the most important.
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KEY MATH CONCEPTS
1. You can use basic addition, subtraction, multiplication and division to calculate many of the profit
and expense figures that relate to your restaurant’s budget.
Example A: All expenses for your restaurant for the quarter came to $21,111. This figure
represents about 25% of your profits. How much did you make that quarter?
25/100 = Expenses
$21,111 x 4 = $84,444
Answer = $84,444
KEY TERMS
Income Statement
Statement showing your
revenue (sales) and expenses
for a given period of time.
Control
The process of recognizing
spending trends and adjusting
them to achieve a profit.
Expense
An item you spend money on
during a period. These are
categorized to help you track
them better.
Percentages
It is often useful to look at
expenses and margins on your
P&L as a percentage of total
sales.
Budget
The amount of money you plan
to take in or spend during a
certain period.
Balance Sheet
Statement showing what the
business owns (assets) and
owes (liabilities) at a given
point in time.
Declining Budget
The amount of money you have
in your budget, expressed as
how much you have left.
Financial Statements
Technology
The restaurant industry
aggressively uses current
technology in all phases of the
business. Your Point-of-Sale
(POS) is critical to operating
the business.
Financial Statements
Financial statements are the
road map to your business
and can spell the difference
between failure and success.
The two most important
statements are your income
statement (P&L) and your
balance sheet.
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